Claiming Tire Tax Credit on Tax-exempt Sales(2)

QUESTION

We sell taxable trucks at retail. On occasion, we sell these trucks tax-free to state or local governments for their exclusive use, in accordance with the requirements under Internal Revenue Code (IRC) Section 4221(a)(4). With respect to such tax-free sales, can we claim a tire tax credit under IRC Section 4051(d)?

ANSWER

The Section 4051(d) credit is not applicable - it applies only to sales on which retail tax under IRC Section 4051 is imposed. Therefore, the credit would not apply to tax-free sales to a state or local government. However, you should be able to claim a tire tax credit under IRC Section 6416(b)(4).

Section 6416(b)(4) states that if (a) the tire tax owed under Section 4071 "has been paid" on a tire's sale by the its manufacturer, importer or producer, and (b) that tire is sold "by any person" (e.g., a truck retailer) "on or in connection with, or with the sale of, any other article" (e.g., a truck), then "such tax" is considered an overpayment (which is subject to a credit) "by such person" (e.g., the truck retailer), so long as "such other article" (e.g., the truck) is sold to a local or state government for its exclusive use (or for certain other exempt purposes) "by such person."

The language of Section 6416(b)(4) indicates that the tire credit should apply to your sales, if the truck tires are taxable under Section 4071 (and that tax has been paid). This conclusion is also supported (to a limited extent) by two private rulings.

Letter Ruling 8910041 (Dec. 9, 1988) that reconsidered a decision in an earlier ruling, involved the retail sale of school buses to state and local governments. The Internal Revenue Service (IRS) determined that, under Section 6416(b)(4), the retailer could "file for a refund of tax originally paid on tires included on automobile bus chassis it purchased and resold to state and local governments." However, that ruling was revoked without explanation in Letter Ruling 200234040 (May 17, 2002).

The second ruling - Technical Advice Memorandum 200215004 (Dec. 20, 2001) - involved a retailer of heavy vehicles that claimed a tire tax credit under IRC Section 6416(b)(4) in connection with its sale of certain vehicles to local and state governments.

The relevant issue in this ruling was not the permissibility of the tire credit, but the type of documentation required to support such a credit. However, the question of adequate documentation may not have been an issue if the taxpayer had not been entitled to the credit in the first place.

Although the language of Section 6416(b)(4) and the aforementioned rulings indicate that a tire credit is permissible for your tax-free sales to state or local governments, you should proceed with caution for a number of reasons. First, as shown above, the language used in Section 6416(b)(4) is confusing and does not refer specifically to truck retailers.

Also, Section 6416(b)(4) permits the credit only if the tire manufacturer paid the correct amount of tax under Section 4071 (rather than simply requiring that the tires be taxable under Section 4071). From a practical standpoint, it may not be possible for a truck retailer to confirm that the manufacturer correctly paid the Section 4071 tax for the specific tires at issue. Based on an informal discussion with an IRS excise tax specialist, we were advised that the current IRS policy does not enforce this requirement unless the truck retailer has reason to know the tire tax was never paid. However, nothing in Section 6416(b)(4) requires the IRS to adopt or maintain such a policy.

The IRS has given little guidance on this issue in the form of rulings or regulations. Therefore, prior to claiming a tax credit under Section 6416(b)(4), you should consult with your tax adviser.

IMPORTANT NOTE: This document reflects the FET as of 1/3/2005. Transactions prior to this time may be subject to different rules because of changes in the FET Regulations, Statutory Amendments and IRS Rulings issued subsequent to the time of such earlier transactions. Similarly, transactions entered into after 1/3/2005 may be subject to different rules. It is, therefore, essential that users of the outline consult with their tax advisers before relying upon it. Also, users should recognize that IRS Letter Rulings referred to in these materials are binding only on the taxpayers to whom they were issued and only serve as an indication of the IRS's position on any issue.